Senate Judiciary Committee Chairman Patrick Leahy, D-Vt., complained to Mukasey that after five years of efforts to glean the information, the committee still has seen only a fraction of the documents it is seeking.

"There is no legitimate argument for withholding the requested materials from this committee," Leahy wrote in a letter to Mukasey that accompanied the subpoena.

The Justice Department blasted the subpoena as a partisan move.

"We have worked in good faith over the past several months to see that the Judiciary Committee's legitimate oversight requests were being met in a manner consistent with the Justice Department's equally legitimate and long-standing need to provide confidential legal advice within the executive branch," department spokesman Brian Roehrkasse said. "We will now assess our next steps."

Last week, the U.S. Court of Appeals for the Second Circuit issued its opinion in McLaughlin v. American Tobacco Co. The decision constituted a major win for Big Tobacco - and a major loss for the plaintiffs.

The theory behind the case - which was a class action -- was simple. The plaintiff class was composed of persons (and the estates of persons) who had smoked lights cigarettes and allegedly suffered harm. The plaintiff class alleged that the tobacco industry has known for years that "light" cigarettes are not safer than regular cigarettes. Therefore, the class argued, the advertisement campaigns for light cigarettes constituted a form of consumer fraud, in which the seller promised one thing (a safer cigarette) and intentionally delivered something else (a cigarette that was not, in fact, safer).

Given this compelling, simple theory, why did the plaintiffs suffer a major loss? In this column, I'll explain the reasons. I'll also consider what that loss might mean for the future of consumer class actions in the Second Circuit.

A Prediction Made by Many Observers, Based on the Oral Argument, Is Now Fulfilled

Last July I wrote a column suggesting that Michael Hausfeld, one of America's greatest plaintiffs' lawyers, had made a crucial error in an oral argument in this case - an error that, I contended, ensured that the Second Circuit would hand him a defeat. In fact, my prediction was confirmed--Hausfeld lost 3-0 before the Second Circuit. Importantly, however, I was far from

the only person who predicted that Hausfeld would lose. To the contrary, it was the conventional wisdom among lawyers observing the case that the Second Circuit would reverse the lower court's decision. After all, the district judge was Jack Weinstein, and his decision was a true Weinstein special--brilliant, iconoclastic, and somewhat inconsistent with precedent.

Hausfeld's major error, as I explained in my prior column, occurred when he told the panel that there was nothing out of the ordinary with Judge Weinstein's decision, and that they would be breaking with twenty years of precedent if they did not affirm the lower court. That statement was, on its face, ridiculous, and it left the two moderates on the panel - Judges Walker and Pooler - nowhere to turn if they were inclined to help the plaintiffs in the case. (The last member of the panel, Judge Winter, was a lost cause from the start.)

Before the argument, it had seemed plausible that the McLaughlin class action might appeal to the sympathies of the two moderates.

Other lawyers have brought lights cases around the country with mixed success. Moreover, since lights cases are fraud cases involving money damages, not personal injury, they should, in theory, have been easier to certify as class actions, since class actions in tobacco have proven impossible to certify when they involved highly individualized questions regarding cancer and other ailments. But this case proved somewhat different.

Overextending the Reach of the "Fraud on the Market" Theory

Hausfeld hit upon the idea of bringing a nationwide class action based on a federal racketeering statute, the Rackeetering-Influenced Corrupt Organizations ("RICO") law. This strategy had the advantage of permitting Hausfeld to consolidate the millions of small-value individual claims into a single, huge, $800 million class action ($2.4 billion, if treble damages were awarded, as RICO allows).

Racketeering law is still the law of fraud, however, and fraud class actions have their own problems. The single most important problem is that fraud typically requires proof of reliance -- that is, proof that it was the defendant's intentional misrepresentation that caused the victim of the scheme to part with his or her money.

Judge Weinstein held that because the advertisement campaigns for light cigarettes were directed towards the public as a whole, the question of class-wide reliance could be solved by simply borrowing the concept of "fraud on the market" from securities fraud. This theory holds that generalized, class-wide reliance can be shown - and individualized reliance need not be shown - if the defendant engaged in "uniform misrepresentations" to which the entire market for a particular product (such as a stock) was exposed.

Hausfeld suggested at last year's oral argument that the Second Circuit had already held in previous cases such as Moore v. PaineWebber, Inc. that generalized proof of reliance could be adopted by the courts where the defendant engaged in "uniform misrepresentations," and that Weinstein had merely applied Moore to the lights case. In my view, this was Hausfeld's biggest error: to claim

that the facts in the "lights" cases were just like the facts in financial fraud cases like Moore. As the Second Circuit noted in its rejection of Hausfeld's argument, it had stated in Moore that generalized proof of reliance would only be appropriate in the absence of "material variation in the kinds or degrees of reliance by the persons to whom" the misrepresentations were addressed.

At oral argument, the panel in the "lights" case was very concerned that the record suggested that smokers had a variety of reasons for buying "lights" cigarettes -- even though the advertising by the tobacco industry had affected the choices of almost all purchasers. The problem was that no one knew how much that advertising mattered to the smokers' overall decision of which cigarettes to buy, and whether to buy cigarettes at all. People may have bought "lights" for non-health-related reasons.

In sum, by saying to the Second Circuit that its previous rulings obliged it to treat a consumer product like cigarettes just like a financial product or a security, Hausfeld may have caused the panel to rule exactly the opposite way from the way he had sought. In the decision last week, the court seemed to suggest that, notwithstanding Moore, plaintiffs would be hard-pressed to be able to come up with cases where circumstantial evidence would be sufficient to permit a presumption of reliance.

As I said earlier, the decertification of the lights class action was not, in itself, a great surprise. The case was always a bit of a gamble. (In fact, the Supreme Court has just granted review in a federal preemption case that might eliminate "lights" litigation entirely.) But did the Second Circuit go further than just decertifying this particular action, to foreshadow doom for similar consumer actions in the future?

Did the Second Circuit Shut the Door on Future, Similar Consumer Class Actions?

Put another way, by overreaching, did Hausfeld provoke the Second Circuit into overreacting, thus producing a decision that shuts the door for future consumer class actions?

I don't think so. It is important to note that the Second Circuit went out of its way to distance itself from the Fifth Circuit's 1996 decision in Castano v. Am. Tobacco Co,. which the Second Circuit described as imposing a "blanket rule" against class certification whenever issues of individual reliance exist.

Furthermore, the phrase "material variation," which the court used to map out the boundary between acceptable and unacceptable class-wide treatment, is not meaningless --- although Hausfeld, in oral argument, seemed to suggest it was.

Rather, "material variation" clearly contemplates that will be some individual differences between the reasons for reliance among the members of a class. Thus, it does not require, for certification, a presumption that all members of the class have identical reasons for acting (as is the case in fraud-on-the-market in the securities context, where investors are presumed to all know about and act on public information).

Consider, for example, a hypothetical consumer fraud claim based on the purchase of word-processing software that fails to work with a certain type of computer, despite contrary representations by the manufacturer on the box. It may be the case that some of the class of consumers who purchased the software did not, in fact, rely on that representation. For example, some of these purchasers might not have owned a computer incompatible with the software until after they bought the software, so the misrepresentation may have been irrelevant to them at the point of purchase.

However, one might assume that, at the point of purchase, all of the purchasers would have placed a value on the full functionality of the software, even if their decision to buy was not motivated by a desire to exploit that functionality. Let's assume - quite realistically, I think -- that functionality with a typical range of computers is part of the core set of elements that consumers expect in a commercial software program. If so, then the fact that some did not actually subjectively respond to the misrepresentation about functionality should not be, even after last week's Second Circuit decision, a bar to class certification. That is because the differences in various class members' reasons for purchasing the software do not vary in any "material" sense, and thus, the hypothetical class proposed by this example should not fail the Second Circuit's "material variation" test.

A new type of legal service provider emerges through innovation.
When it comes to technology, let me confess, I am definitely not an expert. Nevertheless, I am fascinated by the two types of creativity involved with technology. The most obvious is the technical creativity required to invent and develop a new product or system. But the other, less-obvious type is the client-focused creativity that innovative lawyers demonstrate in developing new products and services as the result of existing technology.

One recent example of this is a product developed by Nova Legal and Advisory, which is located in Sydney, Australia, and consists of both a traditional law firm and a consulting firm. The law firm specializes in commercial legal services and complex corporate transactions, while the consulting firm specializes in corporate governance and risk management. The lawyers worked with the consulting firm’s technology staff to come up with a product called Nova Solutions. As Nova Legal and Advisory describes it, the product is “an integrated online management tool for the governance infrastructure needs of organizations.”

Lawyers and Technicians Collaborate
Basically, Nova Solutions is an online training and compliance program. The firm’s lawyers had developed an extensive understanding of client needs in human relations, compliance, governance and training. They then collaborated with the consulting group’s researchers, technical writers and technicians to convert basic systems into, as the firm summarizes it, “an Internet package tailored to each company, where users can click on a screen to see the company’s policies in relation to a range of regulatory and compliance issues.”

But this product goes even further. Users can click again “to complete a training course to bring them up-to-speed on the company’s requirements in these areas.”

This is at least the fourth such online training and compliance product developed by a law firm. Blake Dawson Waldron, one of Australia’s largest firms, offers Salt TM Enterprise, a fully managed, Internet-delivered service supported by the professional team at Blake Dawson Technology Pty Ltd.

Salt TM Enterprise is quite an extensive program. In Australia, it currently offers 14 courses covering key areas of the law, including corporate governance, environmental compliance and insider trading. There is also a module for information and communication technology companies to help them benefit from Australia’s Free Trade Agreements with the United States, Singapore and Thailand.

And recently Blake Dawson extended Salt TM Enterprise to New Zealand through an affiliation with Kensington Swan, a full-service commercial law firm. Among the 12 courses offered there, several are different from the courses offered in Australia, including “Consumer Guarantees,” “Money Laundering” and “Resource Management.”

There are Stateside examples, too.
“Down Under” law firms aren’t the only ones that offer online training and compliance programs. Holland & Hart offers the Holland & Hart Compliance Management System (HHCMS). Developed in collaboration with My Learning Advantage, Inc., an e-learning software provider, HHCMS is offered as a “fully hosted,” customizable and continually updated service. Its design utilizes a multimedia approach, with video segments at the beginning and end of each course.

A similar training program, but without the compliance component, has been developed by the multi-office law firm Howrey in the form of its Howrey Virtual University, which is a system designed for a group of internal clients—the firm’s associates. Located on the firm’s intranet, this program
allows associates to manage their
training individually, on their own
time schedules.

Applying Preventive Legal Medicine
The point here isn’t the technical creativity. The underlying technology already existed. What is noteworthy is the client-focused creativity employed by the lawyers in these firms. They took an existing system and, with the assistance of technology experts, developed it into a product that not only provides clients with information and knowledge 24-7, but also provides the ability to anticipate and resolve issues that otherwise could grow into major legal problems.

In other words, just like many doctors do with their patients, these firms don’t just “cure” their clients-—they try to keep them healthy by providing preventive legal medicine. And in the process, by applying creativity to technology, they have created a new type of legal service provider. To me, that is really fascinating.